Lawsuit for the Company’s Dissolution for Just Cause and How we by-passed ICC choice of forum in the SHA and enforced the put-option clause through Turkish Litigation.

Author: Servet Cetin

Practices: Litigation, Corporate and M&A

For many investors, the most important thing when investing in a foreign country is to think about the worst case scenario and take precautions accordingly. The worst case scenario is of course losing money invested in that country. To prevent this, arbitration clauses have been included in shareholder agreements for decades. In this way, the decision is made directly by the arbitrators within the framework of internationally accepted rules, rather than having to deal with the courts of the invested country, which can be slow, ineffective and suspected of being corrupt. Enforcement of the arbitration award still falls to local courts, but is subject to more procedural review. This solution is a common solution developed over many years by international investment and trade. However, international arbitration processes can become expensive for small-scale investments. Investors, who are not sure whether they will collect from the enforcement process after the arbitration decision, are hesitant about paying the arbitration expense, which can be almost as much as their investment.

This article is not an academic article, but is written about a practical solution emerging in Turkish corporate law. Company names and operating sectors of the companies are not disclosed here within the framework of the settlement agreement.

When our client came to us, he stated that he signed a shareholders agreement while making an investment and that there was an ICC arbitration clause in the contract. He informed us that the arbitration costs would be at least USD 300,000 in the first stage, and that he would give the same amount in advance to the arbitration lawyers, and that he did not want to do this. He also stated that even if it is decided to apply the put-option clause as a result of the arbitration proceedings, it is not clear whether he will collect his money from the parties after the enforcement process that is supposed to ensure the implementation of the arbitration decision in Turkey. Finally, he made it known that he does not want to incur so much expense for a smallsized investment whose outcome is unknown.

At this stage, we told our client about Article 531 of the Turkish Commercial Code, which gives shareholders representing at least 10 percent of the capital - 5 percent of the capital in public companies - the right to request the termination of the company for just cause.

Although it may come to mind that the dispute should be resolved before the ICC arbitration instead of the Turkish Courts due to the existence of a shareholder agreement between the parties, as stated in the decision of the 11th Civil Chamber of the Supreme Court of Appeals dated 09.04.2014 numbered 2014/141 E 2014/6951 K, the shareholders' agreement is concluded between the shareholders of the company and it is a relative contract while the just cause termination lawsuit, regulated in Article 531 of the Turkish Commercial Code, is a lawsuit filed against the company itself, not against other shareholders. In this regard, the parties to the cases are actually different. In practice, since the majority shareholder usually already has a say in the management of the company, the outcome of both cases comes to the same conclusion. Another feature of the termination case for just cause is that the termination of the company is an "ultima ratio" last resort, and in practice, the alternative is generally to calculate the value of the plaintiff's shares, pay the share value by the company, and remove the plaintiff from the company. In other words, it is the implementation of the put-option by the Turkish court. What is important for the plaintiff is the payment of his money. It does not matter whether the payer is a company or another shareholder. The biggest risk here is that the value of the plaintiff's share is calculated in Turkish Lira and he may not receive the same put-option value stated in the shareholders' agreement, if any. In practice, fair value is paid for the plaintiffs' shares. Therefore, we recommended the plaintiff to conduct pre-litigation research on the company’s and his/her shares’ current value.

So what is just cause? How is it proven? Justifiable reasons are not counted as “numerus clausus.” Justifiable reasons by the courts in practice include 1) continuous inability of the minority to access information and documents related to the company, 2) constant and malicious refusal to distribute profits, 3) obvious mismanagement 4) continuous failure to invite the general assembly to the meeting, 5) sale of the company's valuable assets below fair value or without the approval of the general assembly 6) constantly increasing the salaries of board members and senior managers while no profits are distributed, and 7) systematic and continuous restriction of minority rights.

Another debate is whether there should be existing disputes between the minority and the company before filing a termination lawsuit for just cause. In other words, in order to file a justifiable termination lawsuit, should there be other lawsuits between the parties? Is this a prerequisite? Since doctrine and court decisions have different views on this point, we first requested a general assembly meeting, which had not been held for many years, within the scope of minority rights. Our request was rejected by the company and we had the court appoint a trustee to the company to convene a general assembly. Afterwards, we filed a separate lawsuit for the appointment of a special auditor on some issues within the scope of minority rights, and a separate lawsuit for annulment regarding some general assembly decisions.

At the stage, when the process reached a certain point and the disputes between the parties became concrete, we filed a lawsuit for the termination of the company for just cause. When we examined the official documents that came to the court while the court was calculating the value of our client’s shares, we found that there were some issues regarding transfer pricing and taxes between the company in which the client was a shareholder and another group company that was to be offered to the public at that time and was owned by the majority shareholders. Since we conveyed this issue to the relevant institutions, the public offering processes were interrupted and they agreed with us amicably. Thus, our client's shares were taken over by the majority shareholders for an amount of approximately USD 2,000,000.

Although the shareholders' agreement preferred ICC Arbitration as the sole dispute resolution center, we achieved an effective, inexpensive and result-oriented solution by applying only to Turkish courts.

In my opinion, this path is an exceptional path and a cost analysis should be made. This method should be used to the extent appropriate, especially in cases where the enforcement stage of the arbitration result is uncertain. In cases where the dispute figures are higher and the assets of the defendant parties are sufficient to cover the amount likely to be gained as a result of the case, arbitration should be followed.

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